Euro Week Ahead: ECB Meeting In Focus As Recovery Stalls

Investors will look to the European Central Bank for direction in the week ahead as political risks in Russia and a stalling recovery at home raise even more questions.

LONDON (MNI) - European investors, rocked by some of the steepest equity market declines of the year, will look to the European Central Bank for direction in the week ahead as political risks in Russia and a stalling recovery at home raise even more questions over the Bank's policy approach.

Concern has been heightened, as well, with the slippage of currency area inflation to 0.4% last month - the lowest since the depths of the global financial crisis in October 2009. With negative inflation rates reported in Spain and Greece, and slower-than-expected readings from Italy and Germany, investors are again questioning the ECB's conviction with respect to a full blow deflationary threat in the Eurozone.

The broader economic recovery, at the same time, is doing little to assuage those concerns: German business sentiment has fallen for three consecutive and manufacturing activity around the Eurozone it little changed from modest levels it reached in November of last year (Markit Economics said the gauge hit 51.8 in July, unchanged from June and below the MNI median forecast of 51.9).

Against that backdrop, investors will take their cues from the final reading of activity in the services sectors of Europe's biggest economies Tuesday, in the form of PMI data from Markit, and the first estimate of second quarter GDP growth from Italy.

The latter is likely to provide an interesting contrast to the better-than-expected 0.6% advance reported by Spain last week - a pace that's likely to lead the whole of the currency area in the three months ending in June. Italy, Europe's third largest economy (but its largest bond market) shrank by -0.1% in the first quarter of this year and will have to provide something of a later-hour surprise to avoid slipping back into its fourth recession of the last 10 years when it reports preliminary figures on Wednesday.